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Abstract:
The value relevance of financial and non-financial information is viewed in light of the theory of life-cycle stages. The study tests the evolving role of common financial statement and web traffic metrics for Internet companies. Previous work has reported that web usage measures are of high value relevance, or offer much greater explanatory power than conventional financial accounting information for market values. We do find that conventional financial data, including gross profit and realized growth rates in sales and in gross profit, are value relevant, but to a lower extent than web traffic data. As the industry matures, however, we would expect these relationships to change.

Indeed we find that gross profit and R&D become increasingly value relevant as indicated by time trends. Importantly, there is a clear negative time trend in the eyeball measures. Hence, although still of high importance, the value relevance of non-financial metrics has materially diminished over the 24 months testing period. Accounts for the change in market sentiment during the testing period does not change this finding. The results confirm the view that different value metrics should be used at different stages of the life of an industry. Testing whether the life-cycle theory is anchored more to the maturity of the industry or to that of the individual company, we find the value relevance of non-financial vis-a-vis financial measures to be tied only to the maturity of the sector as a whole.

Internet valuation, web traffic, life-cycle

Abstract:
This study examines executive compensation determinants in the U.S. financial services sector. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. The analysis is conducted for the financial sector as a whole and for each of three sub-groups: commercial banks, brokerage and other non-depository institutions, and insurance companies. Variables that proxy for managerial strategic discretion and task complexity are found to best explain CEO compensation. Corporate governance, including board characteristics and external ownership, is the second leading determinant of pay variation, while firm performance and CEO specific characteristics seem to play the least role. We explore the simultaneous relationship between compensation, firm performance, and board strength and find evidence that the board of directors provides a monitoring function and that a strong board appears to be a substitute with incentive compensation for aligning incentives. These findings, when viewed with subsequent firm performance, support an efficient contracting argument.

Abstract:
This paper explores the advantage of private equity in turnaround situations. Since the analysis and recovery plan of floundering businesses is typically carried out by an external turnaround specialist, it is not clear what causes a breakdown in the ownership-management separation. The paper explores scenarios under which the transfer of ownership to private equity prior to implementing an operational turnaround can emerge as an optimal solution. Also considered is the possibility of investment syndication by which it the potential buyer can share the transaction with other private equity firms. Various alternatives are considered to approach the turnaround process, in particular, ones that allow for management replacement and others that do not.

Private Equity, Turnaround

Abstract:
Venture capital funding is commonly provided to start-up firms on a piecemeal basis over numerous stages. One way in which this can be implemented is through milestone financing, where a venture capitalist commits upfront to providing additional future funding contingent upon the firm meeting certain conditions, or milestones. Alternately, the firm can operate without a firm commitment in place, still reasonably expecting to be able to receive additional rounds of funding after goals are met (round financing).

We identify four dimensions which can affect the optimal contract and choice of financing method: entrepreneurial effort, venture capitalist effort, venture capitalist preference for liquid investments, and heterogeneous expectations about the feasibility of the underlying real technology. The effects of these on the optimal milestone and round financing contracts are examined. Firms that prefer milestone financing to round financing (and conversely) are characterized.

Venture capital, stage financing, milestones

Abstract:
We examine the risk shifting problem of capital investments in a dynamic context. We find that when a firm has a long- lived project and may issue debt in the future, the risk- shifting problem is partially ameliorated early in the project life. In fact, if the potential future cash flows associated with the firm are sufficiently large relative to current cash flows, then the firm may actually underinvest in the risky asset early in the project life. We also consider the case when the firm issues both short- and long-term debt upfront, and find implications for the optimal strategy of debt negotiation. Four debt issuance strategies are considered and the optimal debt maturity mix is derived for each. These strategies are rank-ordered. Rolled-over debt is most efficient, simultaneous debt issuance is next preferred, followed by the two policies of sequentially issuing short and long-term debt. The policy of issuing long-term debt before short-term debt is typically the least preferred.

Abstract:
We examine the valuation role of customer acquisition cost, retention and usage in the wireless industry during the period 1997–2004. We develop and test a model that links customer acquisition cost, customer retention and call usage to future financial performance and valuation. In doing so, we control for the role of traditional accounting measures as predictors of firm performance. Although the wireless industry maintains a rapid pace of technological and commercial changes, fundamental accounting numbers are found to be value relevant. We provide new evidence that customer acquisition cost is likely a firm value driver. Specifically, we show that this cost is positively associated with customer retention, future profits and current market values. However, customer acquisition cost is not associated with future revenues, suggesting that successful investment in customer acquisition is capable of saving future expenses and hence of improving profitability. There does not seem to be a direct association between customer retention and usage. Nevertheless, we document a positive relation between retention and future revenues, as well as a positive association between usage and future profits. Collectively, these results suggest that retention and usage play an important mediating role linking customer acquisition with benefit generation. Consistent with this, we find some evidence that customer retention and usage enhance market values.

Abstract:
Oversight and involvement are essential for a venture capital firm to influence the destiny of the portfolio company. This paper focuses primarily on the venture capital firm's decision to take a formal responsibility through joining the board. Our study uses a large sample of private British companies that received institutional investment between 1999 and 2002. We examine the determinants of board composition and board size. Contrary to common belief, only 30% of the companies have any institutional investor (a "VC") on board. The decision to take a formal board seat is based on the ability to make a contribution: Specifically, on the stage of the portfolio firm, the industry fit between the investment and the venture capital firm, and the overall experience of the latter. Two aspects of British venture capital firms inhibit their role in governance. First, firms that are organised as a public corporation (and not as a partnership) refrain from undertaking a formal board responsibility. Second, some of the more established institutions are organised around branches. We find that the VC firms with branches are less involved with board membership. Finally, we report (but are helpless to rationalize) a sizeable number of cases in which a VC firm is represented on the board yet did not invest in the firm.

Determinants, Venture, Capitalists'

Abstract:
We examine how measures that defend incumbent managers against replacement by rival managers affect the information generated in control contests and how this information is used in subsequent investment decisions. We show that commonly used defensive measures allow shareholders to make better investment decisions than they can make absent these measures. Consequently, the adoption of defensive measures can increase shareholders' wealth. We find that good managers are less defended than poor managers and that managers whose interests are closely aligned with those of the shareholders (e.g., via options or bonus plans) are less defended and have more control over firm decisions than managers whose interests are not so well aligned with those of shareholders. We also show that the informational role of defensive measures depends on the relative uncertainty about the quality of both parties to a control contest.

Abstract:
In this paper we study the pay-for-performance relation for top executives in the computer industry and compare these findings with a large sample of firms from other manufacturing and service industries. For both CEO and the remaining four most highly compensated executives of the firm, we examine whether superior performance is rewarded by higher levels of compensation and whether the form and level of compensation affects future performance. We find cash-based compensation, such as salary and bonus, is influenced by performance. Depending on the growth orientation of the company, pay is tied either to accounting measures of performance or to stock return. Such a dichotomy also prevails with respect to the degree of managerial ownership separation. In contrast, stock-based compensation such as options and restricted stock awards is not reflective of performance, irrespective of growth orientation or ownership structure. Two other interesting findings are that the prevalent use of stock-based compensation in the computer industry does not appear to be the result of computer firms being "cash starved." In addition, stock-based compensation does not appear to lead to larger executive stock ownership, as is widely believed.